What is day trading? The complete guide for beginners

As its name suggests, day or intraday trading is a short-term approach that involves the buying and selling of financial instruments and closing out of positions by the end of the day to profit from small movements in price. The more the asset moves, the more profit or loss you’ll make, depending on which way you trade.

Trading in such a short time horizon allows traders to profit from small price fluctuations while protecting themselves from negative price gaps that might develop overnight between trading sessions, although the strategy doesn’t come without risks.

This approach has increased in popularity over recent years in the UK. Technology has played a big part in this — thanks to fast broadband and mobile connections we have a wealth of real-time market information at our fingertips. This has led to many more people accessing the markets and placing trades throughout the day to try and profit from volatility as market prices go up and down.

As you’d expect, looking for buying and selling opportunities requires a strategy. Here are some of the most popular day trading strategies that can be used by traders of all experience levels.

Price action trading​ is the foundation for all technical analysis, helping traders to identify trends, breakouts and reversals. The strategy involves looking at the movement of a security’s price over a period of time to determine trading decisions.

Scalping is a very short-term strategy whereby the trader buys and sells an individual asset several times over the day, with the aim of making numerous small profits that can add up to a cumulative larger gain (although not always). Some scalpers will trade on the same asset hundreds of times a day — sometimes with only a few seconds’ gap between buying and selling. This strategy requires commitment, concentration and a sharp eye and understanding of short-term charts to make a meaningful profit.

Remember that if trading CFDs on stocks, you will incur a minimum commission fee each time you open or close a transaction, so placing several trades within a short timeframe on shares for a small amount of capital may not end up being profitable. When formulating your strategy, you also have to consider the costs and fees that may apply, to allow your strategy to become profitable.

Short sellers target an asset they believe will decline in value, sell it at a high price with the intention of buying it back later at a reduced rate to make a profit in the difference. Therefore, short sellers are reliant on a drop in a security’s price, in contrast to traders who prefer to adopt a buy/hold strategy.

There is significant cost and risk that comes with short selling. If trading CFDs, any profits you make will be liable for capital gains tax, and commissions are also charged for share positions, meaning that you could end up spending a large amount on costs. There is also significant risk if, after opening a short position, the stock rises. The more it gains, the more you lose, which means there is potentially no limit to your losses.

Losses will affect your account value which might eventually drop below the standard close out level, triggering a close out (also known as liquidation). It is important for you to monitor your account closely when opening a short position and ensure you are using the risk management tools available on our platforms.

Again, this strategy focuses on price action and movements rather than fundamental factors such as the state or overall future of a business (if trading on shares). The technical analysis around momentum trading looks at price projections based on historical price data. While it is all about the price, traders need to be aware of macroeconomic events such as news stories that might suddenly influence those prices.

Every trader pays fees to their broker. These vary depending on the product and market you trade, but most forms of trading are charged according to the spread – that is, the difference between the buy price and the sell price quoted on any given market.

For example, if your broker quoted you a spread of 99-101 and you bought at 100, you would only make a profit from 102 upwards. If you choose to short sell, this will cost more as you have to borrow the shares to sell and pay interest on them – this additional cost is factored in the overnight holding costs explained below.

Other potential costs to bear in mind include:

Say a day trader’s technical analysis suggests an upward pattern in a stock’s price. The trader places a buy bet for 1,000 shares at £10 each. Within a few minutes, the price has moved to £10.20 a share, and the trader sells, making 20p per share or £200 on the trade. The price has moved only a small increment, which is why day traders tend to do several trades per day in order to maximize their profits.

Stock screeners​ are a useful tool for picking intraday stocks. You can filter based on criteria such as the following:

Here are some examples of stocks that are popular with UK day traders due to their average volume, liquidity and volatility within the stock market, according to statistics taken from Yahoo Finance.

Next, let’s imagine that the GBP/USD is falling in value due to political volatility and a forex trader spots the opportunity to short sell. When they open their position, it’s trading at 1.23015 so they decide to sell at 1.2301 as they think it will continue to drop further. They decide to open a short CFD position with a total position size of £500,000 or $615,050.

Their prediction is correct and the pound falls to 1.122015. They decide to buy back GBP/USD at the new buy price of 1.12202, closing the trade at $610,100. Because they sold at $615,050 and bought back at $610,100, they make a profit of $4,950.

Day trading forex doesn’t always involve large amounts of capital like the example above – it can also involve profits of £2, £10 or £100 depending on your position size, but as the trader repeats this process multiple times throughout the day, it can amount to large profits for some (or equal losses).

Day traders tend to focus solely on technical analysis and price movements rather than fundamental factors. They can apply a variety of trading indicators​ to help predict price movements, trends and reversals. There is no magic formula on how to day trade, only data, and each trader has their own rules and attitude to risk.

With that in mind, here are some of the most popular technical analysis tools used:

As stated, every trader has their own priorities and goals so specific advice that works for one may prove disastrous for another. Here are some popular day trading tips and rules to follow.

To become a day trader and start spread betting or trading CFDs on more than 12,000 instruments within the financial markets, you can get started by opening a demo account with us. Make sure you understand spreads, margin rates, commission fees and overnight holding costs, which are all important things that should be taken into consideration before getting started within the financial markets.

You can also download our eBook below which gives step-by-step instructions on how to get started and the benefits, risks and other key points to consider when day trading.